Budget Ignores the Areas of Priorities: Prof. Surajit Mazumdar

India’s index of industrial production has been downward bound for some time now, agriculture is under severe stress and global economic condition isn’t helping the Indian economy’s cause any further. The budget that could have helped the economy back on tract has ignored these areas of concern totally. Union Budget 2016 has put the economy under further stress by ignoring areas of importance and has very little to boost investments in key areas like industrial production. In addition, budget also squeezes revenue available to states.

Newsclick interviewed Prof. Surajit Mazumdar of the Jawaharlal Nehru University on the various aspects of the Budget 2016 and its impact on the Indian economy. According to Prof. Mazumdar the Indian economy is staring at a very bleak prospect.

Rough Transcript:

Prabir Purkayastha (PP): Hello and welcome to Newsclick. Today we have with us Prof. Surajit Mazumdar from Centre for Economic Studies and Planning, Jawaharlal Nehru University to discuss the budget. Surajit, the budget claims that we have 7.6% rate of growth, things are looking okay, government had made more allocations in various sectors in never before sectors including MNREGA. But it does not seem to address the fact that our economy seems to be in rather difficult conditions that we don't really have an expansion of industrial production in fact of all. Our exports have been falling, there is an agrarian crisis. So how do you see these two things been said at the same time.

Surajit Mazumdar (SM): Well, I see the budget this time reflects the fact that the gap between what are considered priorities while shaping fiscal policy and budget decisions and what are the real priorities of the economy that gap is actually increasing and it has become very big gap now. If one sees the situation as far as the economy is concerned, of course, we had a long history in which while growth of the economy may have been happening for large segments of the population there have been an income and employment crisis and the benefits of that growth have been very concentrated. We are now actually facing a scenario that very character of that growth process is not allowing the process to be sustained, primarily because of the demand constraints that arise out of that particular trajectory.

PP: When you say demand constraints you mean people do not have ability to buy. So essentially, does not create demand for the industrial goods for various other things.

SM: It does not sustain the condition under which those who are beneficiaries of that process would be able to actually spent because the large part of the spending has to take in terms of investments which seeks some part of a return. It also requires a market for that process to be sustain. So what the reality of the economy today is despite what the statistics issued by the government may claim is that the large segments of the economy are experiencing difficulties in expanding. In times when you have growth, you don't necessarily have employment, income generation of large segments of population. But even that the basic structure is not changing when you have a slowing down of growth. It only aggravates the problem for the ordinary people.

PP: Crisis of the people would be even more if the growth even which is unequal even that growth even does not takes place.

SM: Yes, that is the aggravation that is taking place. Today, you see situation where the agriculture sector is after the period of some revival is again experiencing extreme distress 2 successive bad years have happened, agriculture growth is extremely poor. Industrial production which the national account statistics may claim is growing rapidly by all other indicators is doing very badly. The index of industrial production is itself showing this even if one looks at the data of the national accounts statistics it confirms the views that the actual production of industrial products is not growing extremely rapidly. But since your GDP is value added measure you are getting that the input use is apparently growing at the slower rate. So therefore, the difference is increasing at a fast pace. But the actual volume of industrial production even according to the national accounts statistics data is not very impressive. So the industrial sector has been experiencing a slow down for a long period of time. The agrarian sector is experiencing a distress. Sectors like construction which had grown rapidly for more than a decade and a half are also slowing down which is of course only sector which has seen some increase in employment in the last two decades and you have many services also experiencing the slow down. On the external front, the global economic condition is such that exports are actually contracting since December 2014. so all the indications are that the economy is the grips of the serious crisis. In this crisis, whether one wants to address is the question of the distribution of the benefits of growth. Or if one wants to stimulate the economy to generate growth because this is a situation where there is a very demand constraints you want to stimulate growth you would expect the policy of the government as far as taxation and spending is concerned is to be expansion. Generate demand within the economy which growth could occur and the way in which you generate demand also generate employment and income opportunities for the people.

PP: Which is spend on infrastructure,spend on building industries basically governments spending to spare stimulate the economy. So that is what one would be expect that given economic reality that is to be the priority. Instead, fiscal consolidation or reducing the fiscal deficit is what has been accorded priority. The implication of the economic condition is that the ability of the government to generate revenues under the regime of relatively low taxes that ability is compromised. We have seen in the last year that there has been a severe shortfall in tax revenues that could be mobilized from most heads and in particular from direct taxes corporate and personal income taxes. There is a huge shortfall in the revenue compared what was estimated. The only way government has managed to ensure nevertheless that the fiscal deficit target is met is by mopping up additional resources from excise duties. Excise duties have been the main source of the additional revenues taking advantage of the international oil price fall not passing on the entire increase and repeatedly increasing the duties this has been the major source of income.

PP: Not passing on the benefit of all of the oil price to the consumers but taxing it more to excise duty etc. so that the price still remain roughly there a little bit less but this difference goes into the pockets of the government.

SM: This has also effected the revenues that are available to the states.

PP: By the way if this happens that your direct taxation goes down and indirect taxes increase also meets the burden of mopping up of resources are really from the people.

SM: Absolutely, this has only reinforced the trend that we have seen on for the last few years where the proportion of tax revenue being generated from indirect taxes is increasing. Indirect taxes include also most levied by states are also indirect taxes. So the weight of the indirect taxes in the revenues has been increasing. There has been a big shift in the last year because of this particular pattern that you have a shortfall in the direct taxes which you made up with excise duties and in this years budget also is the thrust as far as revenue mobilization is concerned is entirely placed on indirect taxes. In the realm of direct taxes, some concessions have been given as a result of which there would be a revenue loss.

PP: Inverse Robin hood principle, rob the poor to pay the rich

SM: Yes. So the tax structure is becoming more and more regressive in a situation where your growth process is in any case one which has aggravated the inequality. So you are reinforcing the trend towards inequality in that sense you are reinforcing also the constraints that the economy is facing in terms of it's ability to grow.

PP: So two parts to it. One is the austerity part which is following a kind of philosophy which has basically led to crisis in global economy the European countries is what the government of India is seems to be following. And the second part of it is the burden of the taxes being borne largely by the poor. You were also talking about the transfer to the states. So what is the impact of the transfer to the states.

SM: If the revenue short.. because of the part of the central taxes are to be transferred to the states. So if you have a shortfall in tax revenues then the amount that gets transferred to the states also comes down. So even in the last year there has been compared to what was budgeted to be the amount to be transferred to the states the actual transfer has been less. So which means the states would have been able to spend less than they might have been able to do if the what was budgeted and received actually by them. What is also important to note is that for the coming year the estimates about revenues and expenditure, estimates of revenue particularly are based on the assumption of a nominal growth of GDP which last years experience proved to be showed to be wrong. So last year, estimated to be certain nominal growth of GDP whereas the actual nominal growth has been much lower. They are getting a real high growth as far as GDP is concerned basically because inflation rate being used to gauge what is the real growth is extremely low.

PP: And you don't think it is the real reflection of the inflation in the country today.

SM: No. Perhaps it is not and it is certainly not a reflection of the real growth. The real growth that is being measured. What is also if the next year you have a similar trend. If in the next year there is a similar trend then the revenue estimations that have been made are turned out to be optimistic. Now, one has to see that in the last few years there has been a pattern of the repeatedly revenue fallen short of what was estimated and in order to meet the deficit targets, expenditure sides have also been correspondingly cut off. So you already budget for low expenditures and then you cut it down when the revenue fall short. Last year you manage to avoid some of these difficulty because you manage to take advantage of oil price decline and mop up a huge amount from excise duty. That's not something you can do any more. Oil prices have already fallen to such lows they are not likely to go much further down, they may go up and then it will not be possible to pursue the same method. If you can not and your nominal growth again turn out lower than estimated then you are going to fall short on the revenue front, the central revenues as well as the part that has to be transferred to the states. The implication of that would be that the expenditure that you are making, that you have budgeted. The budgeted expenditure itself has a proportional GDP is slightly lower than last time. And it reflects a trend that has been there for the last few years actually compressing the expenditure as a proportional GDP. So from about more than 14% in the beginning of the decade it is now around 13%. the central government expenditure to the GDP ratio. So you have continued that and if your revenues fall short in the coming years and if you want to commit that fiscal deficit target, then will you have to compress the expenditure further. Which means that you pursuing an expansionary fiscal policy stimulating demand you are letting fiscal policy itself get become part of the process of reinforcing that constraints because if you do not get growth, if you do not get revenues then you spend less. When you spend less you aggravate the conditions which do not allow that growth to actually happen. Of course it means that the requirements of the people in wide set of areas remain addressed in a very limited sense. Of course, government has been emphasizing they increased this head that head they highlight certain heads under which expenditures are increasing but in that present a very partial picture. The finance minister said that he has cut the subsidies on food and fertilizers. So you are trying to supposedly address the agrarian distress, supposedly trying to address hunger and nutrition and you are doing this you are cutting food and fertilizers subsidies. You have cut down on expenditures and things like ICDS so there are heads where you are cutting down because overall what you can spend is set by this limit, you have low taxes, you have fiscal deficit target so therefore, there is a limit where you can spend. All you can do is play around within that. In that expenditure also what is noteworthy despite all the talk about infrastructure. Capital expenditure is falling compared to last year. In real terms it is falling and proportion of GDP is also it is falling significantly. So already very low capital expenditure and is contracting even further.

PP: It is interesting when you talk about contraction and you are talking about the cuts making in terms of different sectors. They have cut dramatically the central universities budget, the IITs budget and what FDI and NIDS and all these central universities budget for almost to the tune of 50% That's a very dramatic cut in the budget allocations for these

SM: That's under some head that some cut has happened but clearly all institutes of higher education are going to face a very tight situation financially in the coming year, that's very clear. That's quite clear from the budgetary allocations.

PP: So what are the final words of the Indian consumers this year? Do you think these policies we are likely to see even lower growth in industries, agriculture and employment? Do you see any revival in the Indian economy taking place under these conditions?

SM: I don't see any revival arising from the decisions as far as budget is concerned. I don't see any revival in general arising conditions of the revival existing in the economy because my understanding is that the growth trajectory India has had over the last two decades or so it's very character has been such that it is in a sense reached certain limits. So the attempt is continuously is to try and revive the growth on the very same basis which has brought the growth process to a halt actually. That's the problem that if you sink, it is like you are sinking into a hole and trying to get out of it by digging more and more. That's the problem that it is continuously accumulating. That's why I said that the gap between what is the requirement of the economy and what is the priority actually guiding fiscal policy day by day.

PP: So what Kanhaiya Kumar said in JNU that other day that the government is trying to run away from the problems that it is facing by creating such issues which are really non issues. Thank you very much Surajit to be with us and hope to catch up with you on these issues as Newsclick examines these issues further. That's all the time we have today for this discussion. Keep watching Newsclick. We will come back to you with other discussion.

 

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